Chemical companies squeezed in the value chain

It is hard to imagine a more difficult outlook for the rest of the year:

• Speculators have increased oil prices, funded by expectations of new central bank quantitative easing programmes
• Consumers are suffering from stagnant incomes, high levels of unemployment and fear of further declines in living standards
• Policymakers seem incapable of finding solutions to the Eurozone debt crisis, China’s rapid slowdown and the US ‘fiscal cliff’ threat

Sadly, the chemical industry sits in the middle of all these problems.

As the chart shows, based on ThomsonReuters data, the largest chemical companies such as SABIC or BASF have market capitalisations (caps) of between $30-$80bn. This seems enormous, but is dwarfed by the $400bn of ExxonMobil. And the specialty companies are tiny by comparison, with caps of $3bn-$5bn.

So it is very difficult for companies to resist the pressure for higher feedstock costs, when oil prices rise. But when they try to pass these increases down the chain, they find they are also in an unequal fight.

Companies downstream have to deal with cash-strapped consumers, whose discretionary spending has been reduced by today’s high oil prices. So they fight prices increases with all the tools at their disposal. And the auto companies, although they have similar caps, also benefit from operating in markets which are more oligopolistic than for most chemicals.

Similarly, companies in the consumer products and retail sectors have stronger market positions. Coke and Pepsi also have caps twice the size of SABIC and BASF. Whilst Procter & Gamble and Nestle, plus retailer Wal-Mart, are 3 times the size.

Thus the chemical industry is now being squeezed between the giants on either side of it. Maintaining profits and volumes is likely to become increasingly difficult as the year progresses.

Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments, are below:PTA China down 24%. “Major polyester makers said that they do not think demand will improve significantly for the rest of the year because of slower economic growth in China”HDPE USA export, down 20%. “Tightness has amplified by plant turnarounds in Latin America, including in Argentina, Brazil and Mexico”Naphtha Europe down 11%. “Further crude oil-driven naphtha price hikes could continue to disrupt already-weak demand”Brent crude oil down 8%Benzene NWE up 1%. “Sources expect the market to be in a more balanced position in September following the tightness since June”S&P 500 Index up 4%

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry.

The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such as oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts.

Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.